WHY ‘DYNAMIC CAPACITY’ IS KEY TO INVESTORS’ ABILITY TO PREDICT A FIRM’S FUTURE PERFORMANCE IN 4IR

by Stephen Wyatt is published by Kogan Page

In 2015 the World Economic Forum (WEF) seized on the phrase the 4^th Industrial Revolution (4IR). 4IR is enabled by the adoption of new technologies (for example, Biotech, Nano, Artificial Intelligence, Machine Learning, Robotics, etc.). However, it also presents the opportunity to address societal inequalities, tackle issues of sustainability and create a more human-centered future. It is driving fundamental changes in the context and speed of business and what businesses need to do to thrive. Similar societal and business disruptions were driven by the adoption of mass-production, which was core in the 2^nd Industrial Revolution, and digital-computing, which was core in the 3^rd Industrial Revolution.

No industrial revolution happens ‘overnight’. Each company moves at its own speed; some, such as Tesla, are born in 4IR, others, such as Honeywell, pivot and adapt. Many others lag behind or fail altogether, perhaps because they’re approaching the future from the lens of their past. As with all industrial revolutions, dramatic differences are being experienced in wealth creation between firms (and individuals).

Why we need to a new way to predict future performance

Investments in companies that thrive in the new outperform investments in those companies that continue with business models and decision-making criteria ‘as was’. Ford mastered mass-production in the 2^nd Industrial Revolution, companies such as Digital and Compaq rode the wave of the 3^rd, but it’s companies like Tesla and Nvidia that are prospering in the 4th.

In 4IR sector boundaries are blurring, business models are changing and non-traditional competitors are emerging. The future is less like the past and the context of business is more volatile, uncertain, complex and ambiguous (VUCA). In this new environment, every business leader, investor and analyst is still required to assess how well a company is likely to perform whilst recognizing that the future is unknown. Looking at a business through the lens of past success or existing market structure delays adaptation and preparation to win in the future. In 4IR a corporation’s competitive strategy and operational excellence remain important but, in addition, stakeholders need to look critically at 4IR relevant capabilities and activities.

What is ‘Dynamic Capacity?’

Working with executives from over 80 corporations we worked to identify the relative strengths of different sets of capabilities and to then develop an understanding of those that most differentiate performance in 4IR. We then tracked the share-price performance (of those that were public-listed) over a five-year period (Dec 2014-Dec 2019).

The share price of those firms with above average ‘dynamic capacity’ outperformed their own sector peers by just over 30% on average. Whereas the share price of those firms that had below average ‘dynamic capacity’ underperformed their own sector peers by approximately 15%.

A company’s dynamic capacity rating acts as a leading indicator of future differential share-price performance. The differences are most pronounced in sectors that are fastest moving (such as IT, Communications, and Semiconductor).

How to measure Dynamic Capacity

There are the three groups of capability that differentially enable an organization to thrive in the dynamic context of 4IR:

1. The level of Dynamic Capacity. Three capabilities combine together to produce the capacity of an enterprise to pivot and adapt in a timely manner to the future as it unfolds.
   1. Sensitivity to the forces and events that could drive change (and the ability to make-sense of these, to distinguish which are most important to pay attention to). A corporation that is actively engaged in territories globally, could have a structural advantage in sensing what’s driving change, but only if it configures processes and has the culture of listening to the periphery. Rapid in-market experimentation can also help probe what might be evolving.
   2. The ability to quickly decide how to respond and to implement actions that seize on an emergent opportunity, combined with the ability to rapidly scale-up and replicate these initiatives elsewhere. Moving people fluidly between markets can help to accelerate knowledge development and reapplication. This can be facilitated with an organization structure designed to develop, share and apply insight rapidly; for example, grouping markets by similarity of demand or competitive dynamics rather than by geographic proximity.
   3. The ability to adjust the activities and assets of the corporation, how they are configured, what is within and what is outside the boundaries of the enterprise, and how they collaborate externally. For some corporations, such as Unilever and Honeywell, this has resulted in significant series of divestments and acquisitions. Others such as Caterpillar have shown prowess in supply chain flexibility. Collaboration skills, inter-firm and within the business eco-system have become core differentiators of performance for firms such as P&G (for example, the recent creation of the iLab in Singapore).

2. The desire and ability to develop Dynamic Capacity is driven by a strategic outlook that is forward-leaning; a hunger for the ‘to be’ rather than comfort with the ‘as is’. This also has three identifiable components.
   1. A clear, ambitious vision for the future that aligns and energizes stakeholders. Often such visions are based on the pursuit of a societal impact (Purpose-led). For example, Paul Polman’s vision for Unilever to halve its environmental impact whilst doubling the size of the business and to positively impact the lives of a billion people. The primacy of the pursuit of the longer-term purpose provides direction which can help to resolve difficult choices, particularly short-term results vs. longer-term objectives.
   2. Empowering managers to own and to resolve seemingly conflicting goals; such as enhancing operating efficiency and also seeking greater flexibility, or the tension of delivering on current period budgets and forecasts whilst building the capabilities and processes for tomorrow. We found that the greater the proportion of the management cadre that was empowered to think ambidextrously (resolving such tensions), the greater the Dynamic Capacity of the firm.
   3. The organization needs to be energized by continuous adaptation and adjustment. Organizations can become ossified due to their existing practices and organizational structures; departments optimising their performance at the expense of overall, total firm performance. A technique that assists ensuing evolution through continuous change is to designate and empower a C-suite executive to drive and coordinate acceleration. Another technique is to ensure that a common doctrine of change management is understood throughout the organization and that doctrine includes disseminated, empowered, yet coordinated, leaders and teams.

3. The ability to leverage and maintain the Dynamic Capacity is dependent on being effective in developing and deploying 4IR capable talent. In 2020, the World Economic Forum predicted that 50% of employees in developed economies will need to reskill, adopting 4IR relevant skills, by 2025. There is a significant and growing deficit of the skills required for 4IR, both technical skills and managerial and leadership skills. Most people haven’t had the relevant education or experience to manage in 4IR. Three key shifts in talent management are essential to operating dynamically:
   1. The ability to continuously upskill and reskill, at pace, across large proportions of the workforce.
   2. The ability to deploy talent fluidly and flexibly. In particular, the ability to form, perform and reform in teams, creating opportunity and career mobility.
   3. The adoption of human-centered workforce practices that promote employee well-being and support appropriate flexibility.

Dynamic Capacity is a leading indicator of firm performance. The faster the marketspaces in which the firm operates are evolving, the more important is the level of Dynamic Capacity. An indicative assessment of the current level of Dynamic Capacity and insight as to which capabilities to focus on enhancing, is easily achieved by executives with inside knowledge of the firm. One way of assessing this is to complete the questionnaire we developed in our research and then discuss the results. An abridged version of the questionnaire can be accessed online for free at https://www.corporaterebirth.com/. On completion of the survey, the executive immediately receives a report in which the strength of the elements of Dynamic Capacity are compared with the median of all participants to-date. A more comprehensive assessment is available in the book ‘Management and Leadership in the 4^th Industrial Revolution’. External analysts and potential investors can also use these tools and the overall framework to guide and organize their research.

The 4^th Industrial Revolution is an exciting time, disrupting ‘what is’ and presenting an opportunity to create ‘what will be’; leveraging multiple new technologies, inventing new business models and addressing societal issues. To thrive, organisations need to have the capacity to act dynamically, to adapt, without being restricted by existing practices or past successes. They need to be energized in the pursuit of a meaningful purpose, expectant of and driving change. To succeed they also need to proactively invest in talent; reskilling/upskilling for 4IR, fluidly deploying teams and fulfilling a Duty-of-Care to all workers.

Stephen Wyatt is Professor of Strategy & Leadership at University of Bath, Industrial Associate at the University of Cambridge and author of Management & Leadership in the 4^th Industrial Revolution.